Controlling firms through the majority voting rule

Abstract

Pyramids, cross-ownership, rings and other complex features inducing control tunnelling are frequent in the European and Asian industrial world. Based on the matrix methodology, this paper offers a model for measuring integrated ownership and threshold-based control, applicable to any group of interrelated firms. In line with the theory on pyramidal control, the model avoids the double counting problem and sets the full-control threshold at the conservative -but incontestable -majority level of 50% of the voting shares. Any lower threshold leads to potential inconsistencies and leaves unexplained the observed high level of ownership of many dominant shareholders. Furthermore, the models lead to ultimate shareholders' control ratios consistent with the majority voting rule. Finally, it is applied to the Frère Group, a large European pyramidal holding company known for mastering control leverages.

Ownership and control in shareholding networks

“…Each company corresponds to a node and a link from node i to node j exists if i owns shares of j. Therefore, we obtain a directed graph and the direction of actual links is the opposite of the ones of Garlaschelli et al (2005), but the same used in Chapelle and Szafarz (2005), Salvemini et al (1995). In our network construction, the number of links exiting from a node, i.e.…”

“…We proceed evaluating portfolio diversification, wealth, ownership, control, and the correlations among them (Chapelle and Szafarz 2005;Salvemini et al 1995).…”

“…It is worth remarking that the analysis of ownership/control is based on inputoutput matrix approach for indirect ownership computation (Chapelle and Szafarz 2005;Dietzenbacher and Temurshoev 2008;Huber and Ryll 1989;Salvemini et al 1995;Turnovec 1999Turnovec , 2005. In fact, while direct ownership in a sector can be readily obtained from data on shareholdings, the true ownership structure may be hidden by a complex network of indirect relations.…”

“…Moreover, in Turnovec (1999), Turnovec (2005) all the shares are owned by individuals and companies listed in the sample, whilst this condition does not hold for the sample of companies traded on one selected Stock Markets. We follow the approach of Chapelle and Szafarz (2005) because, under mild hypotheses, it is well suitable for networks with cycles and it provides a clear analysis of the role of each company in the system avoiding double counting problems not considered in the previous papers. We refer to Chapelle and Szafarz (2005) also for the definition of control, leaving the analysis of other means of control for future work.…”

“…We follow the approach of Chapelle and Szafarz (2005) because, under mild hypotheses, it is well suitable for networks with cycles and it provides a clear analysis of the role of each company in the system avoiding double counting problems not considered in the previous papers. We refer to Chapelle and Szafarz (2005) also for the definition of control, leaving the analysis of other means of control for future work.…”